Apple’s Plan For Baseband Modems Farfetched: BMO

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Apple’s Plan For Baseband Modems Farfetched: BMO
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Apple Inc. (NASDAQ:AAPL) is planning to come up with a team to develop baseband modems to be used in iPhones in 2015, says a recent report from Digitimes. However, BMO Capital Markets analyst Tim Long in a report on April 8, 2014, stated that there is a slim chance that Apple would vertically integrate into the baseband. Despite Apple being a “chipset customer” for Qualcomm, Inc. (NASDAQ:QCOM), the analyst believes that there are several reasons why the iPhone maker would not foray into the baseband.

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Qualcomm a big player

Developing baseband models is not an easy job, believes Long. Intel Corporation (NASDAQ:INTC) and Broadcom have been manufacturing baseband modems for a long time now, and despite that fact, the analyst has not heard any information of “either shipping an LTE modem to the market in meaningful volumes, and each has single digit and falling market share in 3G.” Also, one of the biggest semiconductor companies globally, Samsung, uses its baseband in only one or two of the models of the Galaxy S4, believes the analyst.

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Qualcomm, Inc. (NASDAQ:QCOM) is a big player when it comes to baseband modems. In the December 2013 quarter, the company shipped 213 million baseband modems, which accounted for a 66% share of 3G/4G devices. With such a big scale, it becomes tough for smaller players including merchants or vertically integrated players to compete effectively with Qualcomm, “particularly if CDMA is to be included,” believes the analyst. A similar trend has been noticed in the industry in last few years.

Apple IPR risk might increase

Qualcomm, Inc. (NASDAQ:QCOM) along with the product offers “IPR protection,” which is one of the reasons buyers prefer QCOM’s products. Apple Inc. (NASDAQ:AAPL) in the case against Samsung used Qualcomm chipset’s pass through as a defence. This indicates that if Apple moves away from Qualcomm, it would increase the IPR risk for the iPhone maker.

The timing for Apple Inc. (NASDAQ:AAPL) to foray in the segment does not make sense, according to Long. The decision to use baseband modem in the 2015 iPhone is expected to come in the second half of 2014, and “If Apple is forming a team now, we think there is no way that timeline could be met,” believes the analyst.

The BMO Capital Markets analyst has raised the estimates on Qualcomm, Inc. (NASDAQ:QCOM), and maintains their Outperform rating on the stock with a price target of $90.

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Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com
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